Corporate mobility in the European internal market – a flash in the pan?

W. Georg RingeUniversity of Oxford, Faculty of Law

Corporate mobility in the European internal market – a flash in the pan?

Université de Laval, 18 Mars 2014

18 Mars 2014Corporate mobility in the European internal market – a flash in the pan?

Page 2

Paper motivation

This is an empirical paper, testing the extent of “regulatory competition” in European Union (EU) company law[NB: the paper is available at http://ssrn.com/abstract=2247323]

One of the EU’s cornerstones is “freedom of establishment” for companies

As interpreted in the famous Centros case (1999), it has opened up the borders for companies, similar to the Delaware effect in the US

This is the ‘market solution’ = let companies decide on where to incorporate

-> competition between lawmakers?

http://ssrn.com/abstract=2247323

http://ssrn.com/abstract=2247323


Page 3

Overview

(1) The Centros case and its impact

(2) First empirical evaluations

(3) Regulatory responses of EU Member States

(4) Empirical re-assessment and evaluation

(5) Interpretation of the results

(6) Conclusion

18 Mars 2014Corporate mobility in the European internal market –a flash in the pan?

Page 4

(1) Centros and its impact

Historically, jurisdictions have followed different principles in company law Incorporation theory (UK, NL) Real seat theory (Germany, Austria)

Transfer of seat mostly not possible

Daily Mail ruling (1988)

Proposal for a directive on the transfer of seat (1990s)

Centros ruling (1999)

Incorporation No operation in A; only reason for incorporating in A is to circumvent minimum capital requirements in B

Member State A (‘home’) Member State B (‘host’)

May B refuse the registration of the company’s branch in B due to the fact that the only reason

for incorporating in A is to circumvent more restrictive legal requirements in B?

Centros (1999)

Incorporation and operation

Transfer of real seat

Member State A (‘home’)Member State B (‘host’)

May B refuse immigration (transfer of real seat) of a validly incorporated

company because of different conflict rules regarding company law?

Überseering (2002)

IncorporationMember State A (‘home’)

Member State B (‘host’)

May B impose a minimum capital require-ment on ‘formally foreign’ companies?

Inspire Art (2003)

No operation in A; the only reason for incorporating in A is to circumvent minimum capital requirements in B


Page 8

(1) Centros and its impact

Further ECJ rulings:- SEVIC (2005)- Cadbury Schweppes (2006)- Cartesio (2008)- Vale (2012)Impact:- Liberal interpretation of freedom of establishment- Creation of a ‘market for corporate law’- English corporate law is most attractive

- No minimum capital requirement- Incorporation service – fast and supportive

- Strong impact in D where min capital of € 25,000- Competition accelerated by the emergence of intermediary

agencies


Page 9


Armour (2005)


Page 10


Bratton et al (2008)


Page 11


Becht et al (2008)

1997 1998 1999 2000 2001 2002 2003 2004 2005 20060

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

New English private limited companies in Germany 1997-2006

newly set up

total

Year

Num

ber


Page 12


Becht et al (2008)

1997 1998 1999 2000 2001 2002 2003 2004 2005 20060

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

New English private limited companies in Austria 1997-2006

newly set up

total

Year

num

ber


Page 13

(3) Regulatory responses

National corporate law reforms- France 2003 (SARL reformed)- Spain 2003 (new SLNE)- Germany 2008 (UG = new GmbH variant)- Denmark 2009- Netherlands 2010

- UK (!) 2006 (CA)


Page 14



Page 15


Open questions Why reforms in continental Europe? What is the impact?

Slowing down of English incorporations? Slowing down of English incorporations because of the law reforms?

‘Success’ of law reforms?


Page 16

(4) Empirical re-assessment

Data of Fame database (English Companies House) Incorporations 2004-2011 Filter: ‘Foreign companies’

At least one director is German Registered office is identical for at least 100 companies

Monthly coverage


Page 17


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400

Germany-operating English companies 2004-2011

Incorporations


Page 18


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400


active dormant in default dormant + default in liquidation winding up dissolved


Page 19


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400


Incorporations


Page 20


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Germany-operating English companies as % of total UK companies

%


Page 21


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400


Incorporations

MoMiG23/10/2008

Gvt draft23/5/2007(€ 10 000)

First draft29/5/2006(€ 10 000)

Reform Rumours


Page 22


Claim of ‘successful law reform’ questionable Support by comparison to Austria

Similar legal system and tradition Minimum capital requirement for an Austrian GmbH: € 35,000 No lowering of minimum capital requirements after Centros

Identification of a corresponding data sample

Filter: ‘Foreign companies’ Fame database 2004-2011 At least one director is Austrian Registered office is identical for at least 10 companies (adapted to

GDP)


Page 23


Jan-04

Apr-04Jul-04

Oct-04Jan-05

Apr-05Jul-05

Oct-05Jan-06

Apr-06Jul-06

Oct-06Jan-07

Apr-07Jul-07

Oct-07Jan-08

Apr-08Jul-08

Oct-08Jan-09

Apr-09Jul-09

Oct-09Jan-10

Apr-10Jul-10

Oct-10Jan-11

Apr-11Jul-11

Oct-11

0

50

100

150

200

250

300

Austria-operating English companies 2004-2011

Incorporations


Page 24

(4) Empirical re-assessmentAustria-operating English companies 2004-2011


Page 25


Jan-04

Apr-04Jul-04Oct-04Jan-05







Apr-11Jul-11Oct-11

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Austria-operating English companies as % of total UK companies

%


Page 26


Results Slowing down of the number of incorporations for Germany and

Austria since spring 2006 (‘flash in the pan’) Timeframe is important

Before German law reform (MoMiG) Slowing down in Austria despite no abolition of minimum capital

requirements there have to be other explanations First conjectures

Anticipation of law reforms Initial demand met (Psychological) acceptance problems Bad reputation due to high rate of insolvencies


Page 27


Decreasing attractiveness Legal loopholes closed Elimination of restructuring opportunities

2003-05 mobility-friendly case-law Acceptance of foreign companies (BGH March 2003) Liability of shareholders and directors according to foreign law

(BGH March 2005)


Page 28

(5) Interpretation of the resultsSince 2006 more restrictive caselaw to prevent misuse

1) Obligation to file for insolvency and liability according to German lawLG Kiel 2006; MoMiG 2008; KG 2009

2) Ban on exercising a profession or business for managing directors of a GmbH applies to directors of a foreign companyOLG Jena 2006, BGH 2007 (+ MoMiG, Nov 2008)

3) German principles of estoppel liability applyBGH February 2007

4) Ban on sole ‘corporate director’ according to English lawReform of English law, October 2008

5) Disqualification of foreign directors according to English lawReform of English law, October 2009

6) UK jurisdiction for intra-company disputes acc to Art 22(2) Brussels RegulationOLG Frankfurt Feb 2010; BGH 2011

7) German criminal law applies (embezzlement)BGH April 2010


Page 29


Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400


Incorporations


Page 30

Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Jan-0

6

Apr-06

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-0

8

Oct-08

Jan-0

9

Apr-09

Jul-0

9

Oct-09

Jan-1

0

Apr-10

Jul-1

0

Oct-10

Jan-1

1

Apr-11

Jul-1

1

Oct-11

0

200

400

600

800

1000

1200

1400

Incorporations

Inadmissibility of a corporate director,

Oct 2008

Obligation to file for insolvency, April 2006

Ban on exercising a business,March 2006 / May 2007

Estoppel liability, February 2007

German criminal law,April 2010

English disqua-lification, Oct 2009

Jurisdiction is in the UK, Feb 2010


Page 31


Austria:

2004-09 mobility-friendly caselaw Acceptance of legal capacity and capacity to act (OGH 1999) Acceptance of entire law of incorporation (OGH 2004) No piercing of the corporate veil (OGH 2009)

Also restrictive attitude from the beginning OGH 2004: Strict evidence requirements for Austrian branch Minimum corporation tax as domestic GmbH (Feb 2006) No registration where lack of Austrian banking licence (OGH

2008)

Are there German UGs in Austria?


Page 32

(5) Interpretation of the resultsOverall: a combination of factors

- Theory of initial demand- Disadvantages had not been known in the beginning- (Psychological) acceptance problems- Bad reputation due to high rate of insolvencies- Restrictive attitude of caselaw, registries and tax authorities- Law reforms (and anticipation of them)

- UG in Germany- UG in Austria (?)- Tax reform in Austria- Reform of English Companies Act


Page 33

(6) ConclusionResults Initially high demand for foreign legal forms of companies Slowing down of incorporations for Germany and Austria since

spring 2006 Before German law reform (MoMiG) Slowing down in Austria despite no reform of minimum capital

Explanations (Psychological) problems of acceptance Bad reputation due to high rate of insolvencies Initial demand met Anticipation of law reform Increasing restrictive attitude; closure of loopholes from both sides of

the channel and German law reform (MoMiG)


Page 34

(6) Conclusion

Implications Has the German law reform (MoMiG) been superfluous, wrong,

without effect? Impact on legal policy for a law reform in Austria 2013 Overall positive effect of the competition of corporate legal

forms Defensive competition Faster and simpler incorporations; entrepreneurship culture

Negative integration achieves common standards in the same way as positive integration does

Wolf-Georg RingeProfessor of International Commercial LawCopenhagen Business SchoolUniversity of Oxford [email protected]://ssrn.com/author=836081

18 Mars 2014Page 35

Corporate mobility in the European internal market –a flash in the pan?

mailto:[email protected]

http://ssrn.com/author=836081

Corporate mobility in the European internal market – a flash in the pan?

Documents

european internal market

abuse of foe

danish law

market solution

famous centros case

overviewthe centros

corporate personality

host jurisdiction branch